Patients with primary sclerosing cholangitis (PSC) and inflammatory bowel disease (IBD) have an increased risk of developing colorectal neoplasia (CRN) in the proximal colon. To evaluate whether duration and severity of inflammation are linked to the development of CRN in this population. Retrospective, case-control chart review of patients with PSC and IBD at a tertiary care center. Disease activity was scored per colonic segment at each colonoscopy prior to the first instance of observed CRN using a modified Mayo endoscopic sub-score and histologic assessment. Patients in the CRN-positive group were compared to controls that did not. In all, 72 PSC-IBD patients with no history of CRN were identified, 13 of whom developed CRN after at least one colonoscopy at our institution. Patients in the CRN-positive group had significantly more endoscopic (p < 0.01) and histologic (p < 0.01) inflammation in the right compared to the control group prior to the development of dysplasia. There was significantly greater endoscopic inflammation in the segment of the colon with a dysplastic lesion than other segments of the colon (p = 0.018). Patients with moderate/severe lifetime endoscopic (p = 0.02) or histologic inflammation (p = 0.04) score had a lower probability of remaining free of dysplasia during follow-up. Nearly half of the patients with dysplasia had invisible lesions found on random biopsy. Endoscopic and histologic inflammation in the proximal colon are risk factors for CRN in patients with PSC-IBD. PSC-IBD patients frequently have subclinical inflammation, and these findings support the practice of regular assessment of disease activity and random biopsy of inflamed and uninflamed areas in patients with PSC with the goal of reducing inflammation to prevent the development of CRN.