I am a bit puzzled of the statement, but I would say the answer is no.
No neighborhood is specified in advance, in the statement of the question. So if we want to find a smooth cutoff function AND a neighborhood that works with this function, then the problem is unreasonably easy. Take $\eta=1$ on $\Bbb R^n$, the constant $1$ function. Then $\Bbb R^n$ is a neighborhood of $K$ and $\eta$ is $0$ outside of $\Bbb R^n$ (vacuously, and not very interestingly, so obviously this could not be what was meant to be asked).
So then perhaps the statement was meant to be:
Given a bounded and measurable set $K\subset \mathbb R^N$ and any neighborhood $U$ of $K$, does there exist a smooth cutoff function $\eta\in C^\infty (\mathbb R^N)$ such that $\eta=1$ on $K$ and $0$ outside $U$.
But this one is also rather easy to answer, with a counterexample.
Let $K$ be the set of all rational numbers in $[0,1]\subset\Bbb R$. Let $U$ be a neighborhood of $K$ such that $\emptyset\neq[0,1]\setminus U$ (that is $[0,1]\nsubseteq U$, for example $U=(-1,2)\setminus \{\frac1\pi\}$, or $U$ is any open set containing $K$ such that the Lebesgue measure of $U$ is some $\varepsilon<1$, such an $U$ exists for every $0<\varepsilon<1$).
Then there is no continuous cutoff function, much less a smooth one. Indeed since $K$ is dense in $[0,1]$ any continuous function that is $1$ on $K$ has to be $1$ on $[0,1]$ and hence cannot be $0$ outside $U$.
The answer would be positive if we in addition assume that $K$ is closed (and hence measurable, and being bounded would also be compact). There is a $C^\infty$ version of Urysohn Lemma in $\Bbb R^n$ (please see my comment to the OP above for a link).