I don't know a reference but here is a short proof, provided a reference to some other facts. Please let me know if I should explain some details more carefully or work harder to get a reference; I am sure a concise reference for Fact 1 exists.
Your result follows from the combination of the two facts stated below, and the fact that isotopies preserve the property of being an embedded submanifold.
Fact 1. There exists a smooth surface $M'$, a smooth submanifold $N' \subset M'$, and a homeomorphism $h: M' \to M$ for which $h(N') = N$.
Fact 2. Any homeomorphism between smooth surfaces may be isotopied to a diffeomorphism by an arbitrarily small isotopy.
Proof of Fact 1. I will assume $N'$ is two-sided, as the argument is a little bit more awkard if it isn't. Cut open $M$ along $N$ to obtain a compact surface $M_0$, possibly with corners, so that pasting together part of the boundary of $M_0$ results in $M$. Because every surface has a smooth structure, so too does $M_0$. By an isotopy of the gluing map, one may assume that the pasting operation on $\partial M_0$ is smooth (if $N'$ has one-sided components, you need to know that every homeomorphism $\iota: S^1 \to S^1$ with $\iota^2 = 1$ is conjugate to a smooth one). Performing this gluing gives you $M'$, with $N'$ the image of the boundary curves.
Proof of Fact 2. Hatcher gives a nice exposition of this fact here (https://arxiv.org/abs/1312.3518). The fact that the isotopy can be made small is mentioned on page 7.